[ad_1]
Bank of England increases support for pension funds
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The Bank of England has announcing fresh measures to keep the UK’s financial markets functioning, following the turmoil which hit the pensions industry after last month’s mini-budget.
In a statement this morning, the Bank says it will take three ‘additional measures’ to broaden its support, as it prepares to end its emergency backstop support on Friday.
That emergency support saw the Bank promise to buy up £65bn of long-dated UK bonds – at up to £5bn per day. So far, it has only bought around £5bn, having calmed the market panic that saw bond prices slump.
But with that support ending on Friday, the Bank is pledging to increase the maximum auction size, to up to £10bn per day. That could help maintain financial stability this week, preventing bond prices tumbling and forcing liability driven investment (LDI) pension funds into a dangerous spiral again.
.@bankofengland announces further measures to stabilise markets and ensure pension funds have enough liquidity, when its two-week emergency bond-buying spree ends on Oct 14
— Douglas Fraser✒️🎥🎙 (@BBCDouglasF) October 10, 2022
The Bank says:
To date, the Bank has carried out 8 daily auctions, offering to buy up to £40bn, and has made around £5bn of bond purchases.
The Bank is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5bn in each auction.
Secondly, the BoE is launching a temporary scheme to help UK banks to ease the liquidity squeeze on liability driven investment (LDI) pension funds, who were forced to sell assets when UK government bond prices slumped.
This Temporary Expanded Collateral Repo Facility (TECRF) will..
“enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations”.
TECRF will run beyond the end of this week, providing support once the Bank’s bond-buying scheme ends. It will let the Bank accept a range of assets as collateral – including UK gilts and corporate bonds – to help pension funds facing a liquidity squeeze.
Thirdly, the Bank says it also “stands ready” to help the LDI pension industry through its regular “Indexed Long Term Repo operations”. That will also allow funds to borrow cash from the BoE in exchange for handing over assets as collateral.
Last week, deputy BoE governor Sir Jon Cunliffe explained to MPs that some pension funds came close to collapse amid an “unprecedented” meltdown in UK government bond markets after Kwasi Kwarteng’s mini-budged
This morning’s announcement comes as BoE governor Andrew Bailey prepares to face intense scrutiny in Washington this week, where the annual IMF and World Bank meetings are taking place.
Policymakers and investors worldwide, as well as in the UK, have been wondering whether there will be more market disorder once the the Bank’s bond-buying programme ends on Friday.
There are also concerns that by protecting the pensions industry, the Bank is also supporting the government by lowering borrowing costs.
Also coming up today
Rail passengers in Scotland face widespread travel disruption today as ScotRail workers prepare to take strike action.
Members of the RMT will take part in 24-hour industrial action on Monday over an ongoing pay dispute with the nationalised train operator. It means “a very limited number” of ScotRail services will operate on “a very limited number of routes”.
And the Nobel Memorial Prize in Economic Sciences will be awarded this morning.
The agenda
Key events
Filters BETA
The Russian rouble has hit a three-month low as fears grow that Moscow could escalate the Ukraine war, following the attack on Kyiv this morning.
The rouble has dropped to 63 roubles to the US dollar for the first time since early July, before a small recovery.
Russian stocks have also dropped, as geopolitical tensions rise, exacerbated by energy giant Gazprom’s shares starting to trade ex-dividend. The dollar-denominated RTS index has tumbled 6%, while the rouble-based MOEX is down 4%.
The UK government bond selloff is gathering pace, with the 30-year gilt now over 4.5% – up 16 basis points (0.16 percentage points) today.
Despite the Bank’s announcement, long-dated UK bond prices have opened a little lower.
The yield on 30-year UK government bonds have inched up to 4.45%, from 4.38% on Friday night.
Yields rise when prices fall. Before the mini-budget, the 30-year gilt yield was around 3.8%, but it surged over 5% in the days after Kwasi Kwarteng’s statement, forcing the Bank to act.
The Bank of England is providing liquidity support because financial stress in the UK markets remains ‘quite elevated’, explains Professor Costas Milas, of the Management School of the University of Liverpool.
The UK index of financial stress (which takes into account the rise in UK interest rate spreads as well as their volatility) remains as high as when the BoE started its intervention in late September.
Equally important, and as I explain for The Conversation, persistently high financial stress can have a depressing impact on UK GDP for as many as 20 months. So we are not out of the woods yet…
London stock indices open lower
Stocks have opened lower in the City, as worries over the global economy and the Ukraine war weigh on markets.
The blue-chip FTSE 100 index has dropped by 32 points to 6958, down 0.45%.
The domestically-focused FTSE 250 index of smaller companies has lost 0.8%.
Markets are in risk-off mood, after Kiev was targeted by at least four missiles this morning, after a key Russian built bridge in the Crimea was hit by a huge explosion.
The pan-European Stoxx 600 has dropped 0.4%
Last Friday’s US jobs report, showing a continued rise in employment, has deflated investors’ hopes that the Federal Reserve would slow its interest rate rises soon.
And data over the weekend has shown that China’s services activity in September contracted for the first time in four months, as COVID-19 restrictions hit demand and business confidence.
#EnDirecto | Apertura bolsas europeas:
🇩🇪 DAX🔻-0,81%
🇪🇺 EuroStoxx 🔻 -0,83%
🇬🇧 FTSE 🔻 -0,51%
🇫🇷 CAC 🔻 -0,80%
🇮🇹 FTSE MIB 🔻 -0,64%https://t.co/S6BlqkhebB
— Radio Intereconomía (@rintereconomia) October 10, 2022
Updated: Izabella Kaminska of The Blind Spot explains the Bank of England is trying to prevent a ‘fire sale’ of assets, by providing a new facility to help banks provide liquidity to pension funds.
The new facility could also address any shortages of collateral (assets that can be swapped for ready cash).
Ok hearing not so much collateral shortage as a desire to forestall firesales.
— Izabella Kaminska (@izakaminska) October 10, 2022
Interesting that they felt the need to raise the size given how little offers they received in previous operations and how little they have bought
Reserve pricing process remains in place. Either they’re aware of more selling intententions, or they’re wary of the bond sell off
— Antoine Bouvet (@AntoineBouvet2) October 10, 2022
Why the Bank is supporting LDI pensions funds
The Bank launched its support for the pensions industry almost two weeks ago, as pensionsfunds invested in liability driven investment (LDI) were dragged close to a ‘doom loop’.
My colleague Richard Partington explains.
The funds had invested in complex derivatives, using long-dated government bonds as collateral – assets pledged as security to back up a financial contract.
In the market turmoil after the mini-budget, the value of UK government bonds fell sharply as investors began to lose faith in the credibility of the Truss administration to run a sustainable tax and spending policy. This meant a rise in yields – which move inversely to bond prices – in a reflection of the increased cost of government borrowing.
As a result pensions funds invested in LDI schemes faced rolling “margin calls” as the value of the bonds they had pledged as collateral collapsed. The funds then moved to sell other long-dated bonds they held to cover the cash demands, which in turn led to further selling pressure in the bond market in a self-reinforcing downward spiral.
The Bank says that its support will help LDI funds to…
“…address risks to their resilience from volatility in the long-dated gilt market. LDI funds have made substantial progress in doing so over the past week.
Resolution Foundation’s Torsten Bell says the Bank is telling the markets not to test its pledge to restore stability in the long-dated government bond market.
Bank of England sets out its plan to reduce the chance of pension fund driven instability after gilt sales finish on Friday – summary is supporting banks to provide liquidity as @bankofengland itself tries to step back from providing it https://t.co/ooypoxcx40
— Torsten Bell (@TorstenBell) October 10, 2022
Also commits to doubling downs on gilt sales this week if required ie telling markets not to pre-emptively test the @bankofengland
— Torsten Bell (@TorstenBell) October 10, 2022
Former pensions minister Steve Webb says today’s move should reduce the risk of a ‘cliff edge’ when the Bank’s bond-buying programme ends on Friday.
Good to see the Bank of England doubling the limit on its daily limit for gilt purchases (when required). Should help to reduce any risk of a ‘cliff edge’ at the end of the week when the current special measures are switched off.
— Steve Webb (@stevewebb1) October 10, 2022
Some snap reaction:
New: @bankofengland expands gilts intervention. Potential daily debt buying will increase – £10bn today instead of £5bn – & banks & pension funds will be offered collateral support. Aim appears to prop up pensions system without extending debt buying beyond Friday
— Paul Kelso (@pkelso) October 10, 2022
More Bank of England support for unwinding leveraged UK pension fund trades: bigger bond auctions, and a facility to swap collateral including corporate bonds, initially for a month. https://t.co/C8OY5E7WvK
— Peter Thal Larsen (@peter_tl) October 10, 2022
Bank of England increases support for pension funds
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The Bank of England has announcing fresh measures to keep the UK’s financial markets functioning, following the turmoil which hit the pensions industry after last month’s mini-budget.
In a statement this morning, the Bank says it will take three ‘additional measures’ to broaden its support, as it prepares to end its emergency backstop support on Friday.
That emergency support saw the Bank promise to buy up £65bn of long-dated UK bonds – at up to £5bn per day. So far, it has only bought around £5bn, having calmed the market panic that saw bond prices slump.
But with that support ending on Friday, the Bank is pledging to increase the maximum auction size, to up to £10bn per day. That could help maintain financial stability this week, preventing bond prices tumbling and forcing liability driven investment (LDI) pension funds into a dangerous spiral again.
.@bankofengland announces further measures to stabilise markets and ensure pension funds have enough liquidity, when its two-week emergency bond-buying spree ends on Oct 14
— Douglas Fraser✒️🎥🎙 (@BBCDouglasF) October 10, 2022
The Bank says:
To date, the Bank has carried out 8 daily auctions, offering to buy up to £40bn, and has made around £5bn of bond purchases.
The Bank is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5bn in each auction.
Secondly, the BoE is launching a temporary scheme to help UK banks to ease the liquidity squeeze on liability driven investment (LDI) pension funds, who were forced to sell assets when UK government bond prices slumped.
This Temporary Expanded Collateral Repo Facility (TECRF) will..
“enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations”.
TECRF will run beyond the end of this week, providing support once the Bank’s bond-buying scheme ends. It will let the Bank accept a range of assets as collateral – including UK gilts and corporate bonds – to help pension funds facing a liquidity squeeze.
Thirdly, the Bank says it also “stands ready” to help the LDI pension industry through its regular “Indexed Long Term Repo operations”. That will also allow funds to borrow cash from the BoE in exchange for handing over assets as collateral.
Last week, deputy BoE governor Sir Jon Cunliffe explained to MPs that some pension funds came close to collapse amid an “unprecedented” meltdown in UK government bond markets after Kwasi Kwarteng’s mini-budged
This morning’s announcement comes as BoE governor Andrew Bailey prepares to face intense scrutiny in Washington this week, where the annual IMF and World Bank meetings are taking place.
Policymakers and investors worldwide, as well as in the UK, have been wondering whether there will be more market disorder once the the Bank’s bond-buying programme ends on Friday.
There are also concerns that by protecting the pensions industry, the Bank is also supporting the government by lowering borrowing costs.
Also coming up today
Rail passengers in Scotland face widespread travel disruption today as ScotRail workers prepare to take strike action.
Members of the RMT will take part in 24-hour industrial action on Monday over an ongoing pay dispute with the nationalised train operator. It means “a very limited number” of ScotRail services will operate on “a very limited number of routes”.
And the Nobel Memorial Prize in Economic Sciences will be awarded this morning.
The agenda
[ad_2]
Source link
